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Exercise 9-1 (20 minutes)1. April May June Total

February sales:$230,000 10%........ $ 23,000 $ 23,000

March sales: $260,000 70%, 10%.............. 182,000 $ 26,000 208,000

April sales: $300,000 20%, 70%, 10%......... 60,000 210,000 $ 30,000 300,000

May sales: $500,000 20%, 70%.................. 100,000 350,000 450,000

June sales: $200,000 20%........................... 40,000 40,000

Total cash collections..... $265,000 $336,000 $420,000 $1,021,000Observe that even though sales peak in May, cash collections peak inJune. This occurs because the bulk of the companys customers pay inthe month following sale. The lag in collections that this creates is evenmore pronounced in some companies. Indeed, it is not unusual for acompany to have the least cash available in the months when sales aregreatest.

2. Accounts receivable at June 30:

From May sales: $500,000 10%........................ $ 50,000From June sales: $200,000 (70% + 10%).......... 160,000Total accounts receivable at June 30..................... $210,000

The McGraw-Hill Companies, Inc., 2008. All rights reserved.

Solutions Manual, Chapter 9 1

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Exercise 9-2 (10 minutes)April May June Quarter

Budgeted sales in units............. 50,000 75,000 90,000 215,000Add desired ending inventory*.. 7,500 9,000 8,000 8,000Total needs.............................. 57,500 84,000 98,000 223,000Less beginning inventory.......... 5,000 7,500 9,000 5,000Required production................. 52,500 76,500 89,000 218,000

*10% of the following months sales in units.



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Exercise 9-3 (15 minutes)Year 2 Year 3

First Second Third Fourth First Required production in bottles...................... 60,000 90,000 150,000 100,000 70,000Number of grams per bottle......................... 3 3 3 3 3Total production needsgrams..................... 180,000 270,000 450,000 300,000 210,000

Year 2

First Second Third Fourth Year Production needsgrams (above)................ 180,000 270,000 450,000 300,000 1,200,000

Add desired ending inventorygrams........... 54,000 90,000 60,000 42,000 42,000Total needsgrams..................................... 234,000 360,000 510,000 342,000 1,242,000Less beginning inventorygrams.................. 36,000 54,000 90,000 60,000 36,000Raw materials to be purchased grams........ 198,000 306,000 420,000 282,000 1,206,000Cost of raw materials to be purchased at 150

roubles per kilogram................................. 29,700 45,900 63,000 42,300 180,900



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Exercise 9-4 (20 minutes)1. Assuming that the direct labor workforce is adjusted each quarter, the direct labor budget would be:

1stQuarter

2ndQuarter

3rdQuarter

4thQuarter Year

Units to be produced...................................... 8,000 6,500 7,000 7,500 29,000Direct labor time per unit (hours).................... 0.35 0.35 0.35 0.35 0.35

Total direct labor-hours needed....................... 2,800 2,275 2,450 2,625 10,150Direct labor cost per hour................................ $12.00 $12.00 $12.00 $12.00 $12.00Total direct labor cost..................................... $ 33,600 $ 27,300 $ 29,400 $ 31,500 $121,800

2. Assuming that the direct labor workforce is not adjusted each quarter and that overtime wages arepaid, the direct labor budget would be:

1stQuarter

2ndQuarter

3rdQuarter

4thQuarter Year

Units to be produced..................................... 8,000 6,500 7,000 7,500 29,000Direct labor time per unit (hours)................... 0.35 0.35 0.35 0.35 0.35Total direct labor-hours needed...................... 2,800 2,275 2,450 2,625 10,150Regular hours paid........................................ 2,600 2,600 2,600 2,600 10,400

Overtime hours paid...................................... 200 - - 25 225

Wages for regular hours (@ $12.00 per hour). $31,200 $31,200 $31,200 $31,200 $124,800Overtime wages (@ $12.00 per hour 1.5).... 3,600 - - 450 4,050Total direct labor cost.................................... $34,800 $31,200 $31,200 $31,650 $128,850



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Exercise 9-5 (15 minutes)1. Yuvwell Corporation

Manufacturing Overhead Budget

1stQuarter

2ndQuarter

3rdQuarter

4thQuarter Year

Budgeted direct labor-hours................................ 8,000 8,200 8,500 7,800 32,500

Variable overhead rate........................................ $3.25 $3.25 $3.25 $3.25 $3.25Variable manufacturing overhead......................... $26,000 $26,650 $27,625 $25,350 $105,625Fixed manufacturing overhead............................. 48,000 48,000 48,000 48,000 192,000Total manufacturing overhead............................. 74,000 74,650 75,625 73,350 297,625Less depreciation................................................ 16,000 16,000 16,000 16,000 64,000Cash disbursements for manufacturing overhead.. $58,000 $58,650 $59,625 $57,350 $233,625

2. Total budgeted manufacturing overhead for the year (a). . $297,625Total budgeted direct labor-hours for the year (b)............ 32,500Manufacturing overhead rate for the year (a) (b).......... $ 9.16



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Exercise 9-6 (15 minutes)Weller Company

Selling and Administrative Expense Budget

1stQuarter

2ndQuarter

3rdQuarter

4thQuarter Year

Budgeted unit sales............................................ 15,000 16,000 14,000 13,000 58,000

Variable selling and administrative expense perunit................................................................ $2.50 $2.50 $2.50 $2.50 $2.50

Variable expense................................................ $ 37,500 $ 40,000 $ 35,000 $ 32,500 $145,000Fixed selling and administrative expenses:Advertising...................................................... 8,000 8,000 8,000 8,000 32,000Executive salaries............................................ 35,000 35,000 35,000 35,000 140,000Insurance........................................................ 5,000 5,000 10,000Property taxes................................................. 8,000 8,000Depreciation.................................................... 20,000 20,000 20,000 20,000 80,000

Total fixed expense............................................ 68,000 71,000 68,000 63,000 270,000Total selling and administrative expenses............ 105,500 111,000 103,000 95,500 415,000Less depreciation............................................... 20,000 20,000 20,000 20,000 80,000

Cash disbursements for selling and administrativeexpenses........................................................ $ 85,500 $ 91,000 $ 83,000 $ 75,500 $335,000



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Exercise 9-7 (20 minutes)Quarter (000 omitted)

1 2 3 4 Year Cash balance, beginning.............................. $ 6 * $ 5 $ 5 $ 5 $ 6

Add collections from customers.................... 65 70 96 * 92 323 *Total cash available..................................... 71 * 75 101 97 329

Less disbursements:Purchase of inventory................................ 35 * 45 * 48 35 * 163Operating expenses.................................. 28 30 * 30 * 25 113 *Equipment purchases................................ 8 * 8 * 10 * 10 36 *Dividends................................................. 2 * 2 * 2 * 2 * 8

Total disbursements..................................... 73 85 * 90 72 320Excess (deficiency) of cash available over

disbursements.......................................... (2 )* (10) 11 * 25 9Financing:

Borrowings............................................... 7 15 * 22Repayments (including interest)................. (6 ) (17 )* (23 )

Total financing............................................. 7 15 (6 ) (17 ) (1 )Cash balance, ending................................... $ 5 $ 5 $ 5 $ 8 $ 8*Given.



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Problem 9-8 (30 minutes)1. The budget at Springfield is an imposed top-down budget that

fails to consider both the need for realistic data and the humaninteraction essential to an effective budgeting/control process. The

President has not given any basis for his goals, so one cannotknow whether they are realistic for the company. Trueparticipation of company employees in preparation of the budgetis minimal and limited to mechanical gathering and manipulationof data. This suggests there will be little enthusiasm forimplementing the budget.

The sales by product line should be based on an accurate salesforecast of the potential market. Therefore, the sales by productline should have been developed first to derive the sales target

rather than the reverse.

The initial meeting between the Vice President of Finance,Executive Vice President, Marketing Manager, and ProductionManager should be held earlier. This meeting is held too late in thebudget process.

2. Springfield should consider adopting a bottom-up budgetprocess. This means that the people responsible for performanceunder the budget would participate in the decisions by which the

budget is established. In addition, this approach requires initialand continuing involvement of sales, financial, and productionpersonnel to define sales and profit goals that are realistic withinthe constraints under which the company operates. Although timeconsuming, the approach should produce a more acceptable,honest, and workable goal-control mechanism.

The sales forecast should be developed considering internal sales-forecasts as well as external factors. Costs within departmentsshould be divided into fixed and variable, controllable and

noncontrollable, discretionary and nondiscretionary. Flexiblebudgeting techniques could then allow departments to identifycosts that can be modified in the planning process.



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Problem 9-8 (continued)3. The functional areas should not necessarily be expected to cut

costs when sales volume falls below budget. The time frame of thebudget (one year) is short enough so that many costs are

relatively fixed. For costs that are fixed, there is little hope for areduction as a consequence of short-run changes in volume.However, the functional areas should be expected to cut costsshould sales volume fall below target when:

a. control is exercised over the costs within their function.

b. budgeted costs were more than adequate for the originallytargeted sales, i.e., slack was present.

c. budgeted costs vary to some extent with changes in sales.

d. there are discretionary costs that can be delayed or omittedwith no serious effect on the department.

(Adapted unofficial CMA Solution)



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Problem 9-9 (30 minutes)1. December cash sales................................... $ 83,000

Collections on account:October sales: $400,000 18%................ 72,000

November sales: $525,000 60%............. 315,000December sales: $600,000 20%............. 120,000Total cash collections................................ $590,000

2. Payments to suppliers:November purchases (accounts payable).... $161,000December purchases: $280,000 30%.... . 84,000Total cash payments................................. $245,000

3. ASHTON COMPANY Cash BudgetFor the Month of December

Cash balance, beginning................................. $ 40,000Add cash receipts: Collections from customers. 590,000Total cash available before current financing.... 630,000Less disbursements:

Payments to suppliers for inventory.............. $245,000Selling and administrative expenses*............ 380,000

New web server.......................................... 76,000Dividends paid............................................ 9,000Total disbursements....................................... 710,000Excess (deficiency) of cash available over

disbursements............................................. (80,000 )Financing:

Borrowings................................................. 100,000Repayments................................................ Interest......................................................

Total financing............................................... 100,000

Cash balance, ending..................................... $ 20,000*$430,000 $50,000 = $380,000.



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Problem 9-10 (45 minutes)1. a. The reasons that Marge Atkins and Pete Granger use budgetary

slack include the following:

These employees are hedging against the unexpected(reducing uncertainty/risk).

The use of budgetary slack allows employees to exceedexpectations and/or show consistent performance. This isparticularly important when performance is evaluated on thebasis of actual results versus budget.

Employees are able to blend personal and organizational goalsthrough the use of budgetary slack as good performancegenerally leads to higher salaries, promotions, and bonuses.

b. The use of budgetary slack can adversely affect Atkins andGranger by:

limiting the usefulness of the budget to motivate theiremployees to top performance.

affecting their ability to identify trouble spots and takeappropriate corrective action.

reducing their credibility in the eyes of management.Also, the use of budgetary slack may affect managementdecision-making as the budgets will show lower contributionmargins (lower sales, higher expenses). Decisions regarding theprofitability of product lines, staffing levels, incentives, etc.,could have an adverse effect on Atkins and Grangersdepartments.



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Problem 9-10 (continued)2. The use of budgetary slack, particularly if it has a detrimental

effect on the company, may be unethical. In assessing thesituation, the specific standards contained in IMAs Statement of

Ethical Professional Practice that should be considered are listedbelow.

CompetenceProvide decision support information and recommendations thatare accurate, clear, concise, and timely.

ConfidentialityThe standards of confidentiality do not apply in this situation.

IntegrityAbstain from engaging in or supporting any activity that mightdiscredit the profession.

Objectivity Communicate information fairly and objectively.

Disclose all relevant information that could reasonably beexpected to influence an intended users understanding of thereports.

(Unofficial CMA Solution)



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Problem 9-11 (45 minutes)1. Production budget: July August

September October

Budgeted sales (units)........... 35,000 40,000 50,000 30,000Add desired ending inventory. 11,000 13,000 9,000 7,000Total needs............................ 46,000 53,000 59,000 37,000Less beginning inventory........ 10,000 11,000 13,000 9,000Required production............... 36,000 42,000 46,000 28,000

2. During July and August the company is building inventories inanticipation of peak sales in September. Therefore, productionexceeds sales during these months. In September and Octoberinventories are being reduced in anticipation of a decrease in sales

during the last months of the year. Therefore, production is lessthan sales during these months to cut back on inventory levels.

3. Raw direct materials budget:

July August Septem

berThird

QuarterRequired production (units).. .. 36,000 42,000 46,000 124,000Material H300 needed per unit 3 cc 3 cc 3 cc 3 ccProduction needs (cc)............ 108,000 126,000 138,000 372,000Add desired ending inventory

(cc).................................... 63,000 69,000 42,000 * 42,000Total material H300 needs...... 171,000 195,000 180,000 414,000Less beginning inventory (cc). 54,000 63,000 69,000 54,000Material H300 purchases (cc).. 117,000 132,000 111,000 360,000

* 28,000 units (October production) 3 cc per unit = 84,000 cc;84,000 cc 1/2 = 42,000 cc.

As shown in part (1), production is greatest in September;however, as shown in the raw direct materials budget, purchases

of materials are greatest a month earlierin August. The reasonfor the large purchases of materials in August is that the materialsmust be on hand to support the heavy production scheduled forSeptember.



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